Like every other HP stockholder, I lost money as a result of the recent set of decisions made by the HP board and announced on August 18, 2011. Commentators and analysts queued up to express surprise at HP’s plans to conduct a strategic review of the options for the PC Business Unit (PSG), drop the production of WebOS hardware devices (creating an opportunity for many to buy $99 TouchPads), and to spend a wad of cash on Autonomy. Taken separately, each of these steps might make total sense and prove to be well-founded in terms of HP’s long-term success. Taken together and when communicated in the way that the news rolled out, they convey an impression of deckchairs being energetically shuffled.
I don’t think I would have even considered writing those kind of words about HP a year ago. Much has happened since Mark Hurd was dismissed for reasons that still remain somewhat murky to the arrival of a new CEO and the latest set of strategic moves. Change has not been good to stockholders with the share price declining by around 50% in that time. HP still throws off billions of free cash annually and offers the widest set of solutions in the IT industry but somewhere along the line the faith of stockholders has been sorely tested.
Perhaps this is just a nadir before HP lifts itself to new heights. I wish I had the confidence to subscribe to such a theory but I can’t get the lack of coherence and clarity that shone through in HP’s communications out of my mind. The simple fact is that while it seems like HP wants to transform itself into a company that makes more from software than it does today, going out to tell the world that PSG was essentially not in HP’s long-term future , that they were junking the result of a $1.2 billion investment from 2010 (not to mention nullifying all the hype that had been generated since the TouchPad launch on July 1), and that they’d paid a huge premium to buy Autonomy didn’t seem to be parts of a plan that had been well thought through. Largely due to my time spent working within HP’s Office of Strategy and Technology, the lack of coherence and joined-up thinking as conveyed in the announcements came as a huge shock.
My experience is that HP makes strategic moves only after doing a lot of research and accumulating a heap of solid evidence. The quick-fire nature of the announcements didn’t fit with this working model, unless of course HP has assembled a compelling set of data that proved to their Executive Committee and Board that things will become worse if they hadn’t set out on this course.
The irritating thing is that HP’s communication improved rapidly after the initial announcements were thrashed by the analysts. In particular, PSG management and other commentators pointed to the benefits that could be accrued by HP if PSG was spun-off as a separate business as well as the strengths that exist within PSG. Apparently there are some interesting tax advantages in taking this route and of course, not all of the PC business would need to move from the HP mother ship. For example, a spin-out might only take the consumer devices (the kind that show up in retailers like Best Buy) and leave business-class PCs within HP to be sold by HP’s enterprise sales force. Some arrangements might be possible to share components and IP going forward so that both the spin-off and HP continue to benefit from scale, buying power, and shared knowledge. A spin-off might even be able to take WebOS and do something with it to realize some benefit from the $1.2 billion check that HP wrote to buy Palm.
There are disadvantages in a spin-off too. For example, it might not be possible for the spin-off company to take advantage of joint marketing with HP’s printer business to sell PC/printer bundles to customers. But these are challenges that can be worked on over time. If not a spin-off, the desired alternative might be to sell PSG to another company. On August 24, Samsung denied that they are interested and it’s hard to see who else might be interested. What’s for sure is that the worst outcome would be to have PSG limp along as the unwanted child of HP businesses and never go anywhere fast.
In fact, the larger challenge from last week’s announcements might be how to integrate Autonomy into HP’s software business. I can see how there might be a match between Autonomy and HP’s Integrated Archive platform and that HP probably wants to sell more server and storage to run Autonomy deployments. However, the challenge isn’t in making software products work together or figuring out how to bundle software and hardware together. It’s harder to keep people from acquired companies for any significant time after retention bonuses are paid. How long will Mike Lynch and his team of key contributors be happy to work within the HP culture? After all, much of the talent that has joined HP through acquisitions over the years has left reasonably quickly. Think of Ben Horowitz (Opsware) or Rahul Sood (VoodooPC).
It’s just hard to join a company of 350,000 people when you’ve been used to working in a much smaller company or having more authority or influence than you end up with inside HP… or any other large company for that matter. And who could blame the Autonomy talent if they head for the hills to enjoy the large pay-off they will earn from this acquisition?